Making Cents: Financial planning isn't just for adults

Financial planning for your children may seem like a stretch. But not doing it can be just as dangerous as not planning when you are older and have issues and assets.

John P. Napolitano

Financial planning for your children may seem like a stretch. But not doing it can be just as dangerous as not planning when you are older and have issues and assets.

This should start as soon as you are ready to open any sort of financial account for a youngster. A common way to own savings for a minor is under the Uniform Gift to Minors Act (UGMA). Some states call it the Uniform Trust for Minors Act, or UTMA.

In both cases, assets are placed in an account for the benefit of minor children. There is a custodian who can decide how to invest the money and whether to use the assets for the maintenance and support of the minor or save them until that child reaches legal age to take custody themselves. Control cedes to the child at age 18 in UGMA states and 21 in UTMA states. This is my least favorite way to own assets for children simply because of the unsupervised access that the child legally obtains at either 18 or 21.

I don't know about you, but if someone had handed me a big pile of assets at age 18, it might have altered my behavior in college.

I recommend using a trust with stronger provisions than the "child takes all" at age 18. This fix may be critically important if the assets are valuable.

There's also the strategy regarding college savings. Look at 529 college plans. While many investors are unhappy with the performance that they've received for the last decade, a 529 still has many advantages.

The main advantage of a 529 plan is its tax-free nature if assets are used for college, a pretty good deal if you can invest and grow the money in the 529 plan.

Another advantage of a 529 plan is control. The owner of the account can be the person making the gift. A parent, grandparent or anyone else can establish a 529 plan for someone else. Unlike the UGMA, the assets stay in the control of the owner until the owner is willing to let them go to the beneficiary. If the funds come out of the plan and are not used for college expenses, taxes are due, as well as a 10 percent penalty on the gain.

The last point for your children is to be sure that they have certain legal documents in place when they are old enough to be considered adults. That means they should have a health-care proxy, durable power of attorney and maybe even a will or trust.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com.

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